Children's Defense Fund

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February 9, 2005  
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Tax Refund Loans Cost Low-Income Workers
$690 Million in Unnecessary, Unjust Fees

CDF Analysis Shows Expensive Loans Most Common in High-Poverty Neighborhoods

Millions of low-income American workers paid more than $690 million in unnecessary fees and excessive interest in 2003 to quickly collect their tax refunds, according to reports issued today by the Children's Defense Fund.

Through the use of Refund Anticipation Loans (RALs), low-income taxpayers were burdened with interest rates that exceed as much as 700 percent-an unconscionable business practice that siphoned needed cash away from working families.

In 2003, about 6.9 million low-income workers nationwide purchased Refund Anticipation Loans- short-term, high-interest loans that commercial tax preparers push onto low-income tax filers as a way of receiving their tax refunds in a more expeditious manner. The loan is repaid from the tax refund, but the fees associated with the RAL end up costing the individual a large percentage of the refund. The appeal to many families is that, with the RAL, families can receive their tax refunds within two days.

The fees and interest are collected by a fast-growing industry of commercial tax preparers and lenders that take advantage of low-income workers. The firms issue loans with onerous fees even though there is little risk the loan will go unpaid and despite the fact that the government can send the full refunds to those taxpayers-without fees or interest charges-within two weeks without a loan.

CDF's analysis of data for eight states and the District of Columbia found that most purchasers of RALs were low-income taxpayers who claimed the Earned Income Tax Credit, a refundable credit for working low-wage earners. In 2002, the credit lifted 4.9 million people, including 2.7 million children, out of poverty.

"Taking money out of the pockets of working poor families in the form of excessive interest rates and fees paid through RALs is unjust and indefensible," said Marian Wright Edelman, President of the Children's Defense Fund. "There are currently almost 13 million children living in poverty in America. The budget released by President Bush on Monday threatens to plunge them deeper into poverty with proposals that will, for example, destroy the legal safety net for abused and neglected children and take away food stamp benefits from as many as 200,000 working poor families. Now more than ever we need to make certain that working families get back every dollar for which they are eligible to help cover expenses like food, rent, utilities, and child care so that they can stay employed and keep their families intact."

Last year, working in coalition with the Internal Revenue Service and hundreds of faith and community groups across the country, CDF set up free services to help families claim-and keep-more than $65 million in tax refunds. CDF is again this year participating in this initiative, in which volunteers trained by the IRS prepare the tax returns of low-income families free-of-charge and with no fees.

CDF is also working nationally and in states across the country to advocate for legislative reforms that will regulate the marketing of RALs to low-income families. To that end, CDF commended the efforts of Senators Daniel Akaka of Hawaii and Jeff Bingaman of New Mexico who have introduced into Congress the Taxpayer Abuse Prevention Act, which would limit abuses in the RAL industry and make it easier for working families to open low-cost bank accounts so they can receive quick electronic refunds without paying onerous fees.

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National Report:

State Reports:

 

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The mission of the Children's Defense Fund is to Leave No Child Behind and to ensure every child a Healthy Start, a Head Start, a Fair Start, a Safe Start, and a Moral Start in life and successful passage to adulthood with the help of caring families and communities. CDF provides a strong, effective voice for all the children of America who cannot vote, lobby, or speak for themselves. We pay particular attention to the needs of poor and minority children and those with disabilities. CDF educates the nation about the needs of children and encourages preventive investment before they get sick, into trouble, drop out of school, or suffer family breakdown. CDF began in 1973 and is a private, nonprofit organization supported by foundation and corporate grants and individual donations. We have never taken government funds.

 

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